Most millennials starting out in the workplace are burdened with student loans, and the amount of debt is growing rapidly. Between 2007-14, the average student loan debt for a 20-something increased by a whopping 60%. But young people new to the workplace also need to save for retirement. So in the battle of student loans vs retirement savings, which should win? Do you pay down your debt first, or do you save to make sure you get the most out of compound interest and don’t have to rely on Social Security in your dotage?
The answer, as with most difficult questions, is complicated. You can make a decision easily, though, if you pay attention to several key factors.
Student Loans Vs Retirement Savings: What To Know
Interest Rates
Perhaps the key determining factor in where to put your money first is the interest rate on your loan. The stock market has an overall average return of around 8%. Use that as a benchmark. If the rate you’re paying on your student loan is less than 8%, consider just paying at or just above the minimum on your loans, and putting more money into retirement. However, if your interest rate is 8% or above, pay that sucker off as quickly as possible.
401K
A 401K plan is an easy way to save for retirement. Many jobs will let you take the money directly from your paycheck, so you won’t even notice that it’s gone after a week or two. Contribute as much as you can, but even as little as 2% of your check will make a difference in the long run. Plus, if your employer matches the contribution, that’s basically free money towards retirement. So find out how much you have to contribute to get the full employer match, and make sure you do at least that. Also, find out how long you have to stay at your job in order to collect that money! In some cases, it can be up to several years.
Save For A Rainy Day First
Before you begin figuring out student loans vs retirement savings, there’s an important step that has to come first. You need an emergency fund – enough money to cover about six months of expenses. You can find tips on how to create a fund, even if you’re on a tight budget, in this blog post from Student Loan Hero.
Don’t Default
Paying off student loans is an important obligation, so make sure you pay at least the minimum. Deferring is okay if you need to, but do not defer just to pay more into your retirement accounts. Most importantly, never miss a payment. If you do, you risk sending your credit score into the toilet.
Understand Saving Vs Investing
“Saving” means putting your money somewhere, well, safe – like an insured bank account. The drawback is that those accounts have very low interest rates. That’s where you can put your emergency fund.
“Investing” generally involves putting your money in the stock market or other places with at least some degree of risk. However, the rate of return is far higher than savings, and investing in funds tied to the performance of the stock market, which has a historically steady return rate, can minimize your risk.
